DRAFT THE PROGRESS ON AGRICULTURAL INSURANCE IN SOUTH AFRICA

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1 DRAFT THE PROGRESS ON AGRICULTURAL INSURANCE IN SOUTH AFRICA AGRICULTURAL INSURANCE IN SOUTH AFRICA Agricultural insurance in South Africa stems from the 1970 s when a South African government subsidized insurance scheme was put in place to afford/provide farmers the opportunity to insure against drought. The scheme was based on a rand for rand subsidy by the government through private insurance companies. This scheme was not successful due to the huge financial implications for members and that many farmers rather opted for assistance through drought and other disaster relief schemes administered by the then Department of Agriculture. THE COMMISSION OF INQUIRY INTO THE PROVISION OF RURAL FINANCIAL SERVICES (STRAUSS COMMISSION) An agricultural risks insurance scheme has been advocated by the Strauss Commission report, way back in 1996, which recommended that the government should enter in a risk sharing agreement with the private sector to assist farmers, producers and the entire agricultural community. The Strategic Plan for the South African Agriculture, obliges the Department of Agriculture, Forestry and Fisheries (DAFF) to take on disaster risk management and the benefits agriculture risk insurance can offer. 1

2 THE STUDY BY THE DEPARTMENT OF AGRICULTURE (DOA) AND THE USA/SA BI- NATIONAL COMMISSION (USA/SA BNC) In 2002 the DoA conducted a study jointly with the insurance industry and farmers, with the support of the USA/SA BNC. The main objective of the study was on risk management and to develop a legislative framework for crop insurance. In July 2003, the DoA submitted a cabinet memorandum on the Agricultural Risks Insurance Bill, proposing an insurance scheme, which would protect the farmers against risks associated with natural disasters such as drought and floods. For such a scheme to be financially viable it would require the following: Compulsory and full participation of the farming community (in terms of premium contributions, etc); Fiscal outlays in bad production years (Government acts as a re-insurer of last resort); Government subsidies for certain categories of farmers; and Participation of the short-term insurance industry. These proposals were turned down by the National Treasury, with amongst others the main reasons being that as the bill stands, no actuarial estimates indicating the quantum of premiums per farmer and the required participation rate to make the scheme viable were provided; fiscal outlays that would be required from the government to capitalise the scheme were not calculated, and the possible continued subsidization of certain farmers. The National Treasury was also of the opinion that the Agricultural Risks Insurance Bill is too complex and cumbersome, and should not be proceeded with. Lastly, that the key principle and supporting initiatives should rather be accommodated under a focused strategic policy response framework under the provisions of the Disaster Management Act, Act 57 of STUDY THE SOUTH AFRICAN INSURANCE ASSOCIATION (SAIA) In 2011 SAIA decided to have a study done and a position paper drafted on the potential role of crop insurance in the South African agricultural sector within the context of the South African disaster risk management legislation and new agricultural finance strategy of the Land Bank. 2

3 The study discussed disaster risk management; droughts in South Africa as a prominent hazard resulting in a disaster; an overview on the new agricultural development finance strategy of the Land Bank, agricultural insurance in South Africa; interaction with roleplayers, overview of the agricultural insurance solutions in the international arena; the economic rationale for public intervention in agricultural insurance; summary of crop insurance systems worldwide and a summary of findings and recommendations. Summary of findings and recommendations from the study In addition, a desktop study was conducted on the insurance systems in India, Pakistan, Vietnam, Malawi, USA, Spain, Canada, Portugal, Sudan, Turkey, Brazil and Mauritius. Main findings: Public intervention is justified to correct market or regulatory imperfections, in various forms, the most common of which is direct premium subsidies, (32% of surveyed countries) varying from 33% of the estimated actuarial rates in India, while premiums vary from 50% (Spain), to 70% (Guatemala) to 80% (Italy). The question of compulsory versus voluntary is debateable. Governments are tempted to make agricultural insurance compulsory in order to eliminate or at least reduce the need for recurrent post disaster public intervention. Half the surveyed countries have some form of crop insurance legislation, with marked differences across regions. In Europe 71% of the countries have some forms of crop insurance legislation with just 30% in Latin America and Caribbean. Traditionally crop insurance works best for larger farm units (> 10ha) and usually relies on the insurance industry as a distribution channel, which is expensive and therefore often needs government subsidies to make it affordable. Index based solutions can complement traditional crop insurance (selective perils) or be a viable alternative in developing markets with predominately small farm units. Several countries, 11% of the total surveyed, have developed special agricultural insurance delivery channels or programmes for small and marginal farmers or special subsidies to support these farmers. 3

4 Recommendations: A legislative measure should be put in place, for the establishment of a sound agricultural insurance system. An entity should be established as a corporation or agency in order to carry out the management of the pool, within the context of the law. Substantial evidence in the study revealed that participation of South African farmers in any form of agricultural insurance should be at this stage on a non-compulsory basis, although compulsory insurance can under certain circumstances be warranted. With the aim of promoting the development of the agricultural insurance, subsidizing of premiums by the government, seems to be a foregone conclusion. The determining of the financial implications for the fiscus is essential and still valid. The proposal from Munich Re on a consolidated South African crop insurance strategy is recommended as a basis for further development. STUDY INITIATED BY THE WORKING GROUP ON AGRICULTURAL INSURANCE In 2013, the Working Group on Agricultural Insurance, consisting of SAIA, Agri SA, Department of Agriculture, Forestry and Fisheries (DAFF) and the National Treasury initiated a process to design the terms of reference to develop an agricultural insurance policy framework through a public-private partnership (PPP) model. The company, Andisa Agri (partnering with Agrista) with Mr. Duncan Pringle as project leader, was appointed as consultants to develop a policy document with the following: Carry out a global market study (including expert interviews) with regard to international industry practice in agricultural insurance. This analysis will focus on key countries that have been of significant relevance for the development of agricultural insurance and on key industry role players. The market study on crop insurance will, include livestock and forestry exclude fishery. Based on this analysis, a conclusion on best industry practice should be possible. 4

5 Analyze existing public-private partnerships in agricultural insurance, evaluate the benefits of PPPs and outline a proposal for a PPP for agricultural insurance in South Africa. Analyze other government support instruments in the case of catastrophic events and their advantages and disadvantages compared to support via a PPP in agricultural insurance. Analyze the South African market for agricultural insurance both from a farmers and a reinsurers perspective and outline both achievements and short-comings in order to develop a sustainable public-private partnership. Whereas commercial farmers and smallholder farmers will have a similar structural set-up, it will be necessary to develop a proposal for the organization and administration of smallholder farmers in order to make them insurable for re-insurance companies. Develop the key characteristics for a PPP in agricultural insurance giving options for the set-up in conjunction with a cost estimate for the fiscus. Propose a sustainable institutional framework and structure for the provision of agricultural insurance through a PPP in South Africa. The project was finalized at the end of 2013 and DAFF is in the process of studying the report. Agri SA was informed that the working group will meet and will be called upon to discuss the report. Koos van Zyl Kosie@agrisa.co.za 5